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Raising Capital Easier for Small Businesses

Changes to SEC's Regulation A increase limit for simplified public offerings to $50 million, with additional public reporting but no need to seek state approvals.

The U.S. Securities and Exchange Commission (SEC) unanimously proposed boosting by 10 times the amount of money companies can raise under a simplified public offering, the agency’s latest step to ease fundraising by smaller firms.

The SEC measure, released for public comment in Washington today, also would preempt such stock deals from state oversight, a change sought by small businesses and Republican lawmakers who support the change. Firms could elect to raise as much as $50 million, up from $5 million, while providing investors with fewer disclosures than those required of public companies.

The changes to the SEC’s Regulation A are required by the 2012 Jumpstart Our Business Startups Act to encourage investment in smaller companies. The number of businesses seeking to raise money under the current rule fell to 19 in 2011 from 116 in 1997 as businesses complained the requirements are too strict for the limited amount of money that can be raised.

“Our rulemaking goal is to make Regulation A an effective, workable path to raising capital that, very importantly, also builds in the necessary investor protections,” SEC Chairman Mary Jo White said at today’s meeting.

Current Regulation A offers must be approved by the SEC and have typically required less public reporting by companies as long as the number of investors is limited. At the same time, companies using the exemption have had to seek approval by regulators in every state where shares are sold.

“The amount that could be raised through Reg A simply wasn’t worth the delay, to say nothing of the cost,” SEC Commissioner Daniel M. Gallagher said today.

State review of Regulation A deals has been the biggest impediment to its use, said Ben Miller, co-founder of real estate crowdfunding platform Fundrise LLC. States have different standards for approving offers, with some weighing whether investor disclosures are sufficient and others examining the fairness of the deal.

“That’s the big bugaboo, the big structural flaw,” said Miller, whose company has used the exemption to raise money for real-estate developments in Washington. “You can have five, six, or seven states involved. That’s a lot of people parenting you.”

Investor Limits

Under the SEC’s proposal, companies won’t have to seek state approval if they elect a new version of Regulation A, which requires more public reporting than the current exemption. Firms would have to provide investors with audited financial statements, annual and semi-annual reports, and reports of material events.

The new exemption would limit individual investments to no more than 10 percent of a person’s annual income or net worth. The securities would be freely tradeable, although the shares may be less liquid and more volatile than public-company stock traded on a public exchange, SEC Commissioner Luis A. Aguilar said today.

“It is my hope that the final disclosure requirements will protect and inform investors, resulting in the investor confidence necessary for the success of” the new exemption, Aguilar said.

The North American Securities Administrators Association, which represents state regulators, had proposed streamlining state reviews even as it wrote the SEC last week to warn against preempting state authority. The association called for companies to submit fundraising documents to a central system and get feedback from state regulators within 10 days.

“State-level review will help the commission root out fraud and abuse in this new marketplace and will give investors confidence that securities sold in these offerings are subject to an adequate level of scrutiny,” Ohio Securities Commissioner Andrea Seidt wrote Dec. 12 on behalf of the group.

The SEC’s 5-0 vote today marks the third major rule under the JOBS Act advanced by the SEC. The SEC proposed rules to permit equity crowdfunding on Oct. 23 and lifted the ban on advertising private stock deals on July 10.

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